Spanish bailout could reach $125bn

Madrid, June 9, 2012

A bailout for Spain's teetering banks, once requested by Madrid, could amount to as much as 100 billion euros ($125 billion), two senior EU sources told Reuters on Saturday.

Spain has not yet made a formal request for European aid but it could come during a conference call of euro zone finance ministers, the sources, who were both on an earlier call to discuss the technicalities of a rescue, said.

'A decision on Spain will only be taken ... by the ministers (in a second call). Madrid has not officially asked for help yet,' one of the officials said. 'The statement will mention 100 billion euros as an upper limit.'

The Eurogroup of finance ministers is scheduled to begin its call at 4 pm Brussels time (1400 GMT). Earlier, its chairman, Jean-Claude Juncker, called for a 'quick solution'.

Several EU sources told Reuters on Friday that Madrid was expected to ask the currency bloc for help with recapitalizing its banks this weekend, becoming the fourth country to seek assistance since Europe's debt crisis began.

Asked if he expected Spain to request help, Swedish Prime Minister Fredrik Reinfeldt told public service radio: 'I think that is everybody's assessment. There is even talk about amounts up to 80 billion euros.'

It is not clear whether bailout numbers will be finalized on Saturday but the International Monetary Fund gave a clear guide to what it thought was needed, saying that under a stress scenario a number of Spanish banks would need to increase capital by 40 billion euros in total. It advised seeking significantly more than that.

One of the sources who was on the earlier Saturday call said Spain did not want IMF involvement in the package for its banks.

Euro zone policymakers are eager to shore up Spain's position before June 17 elections which could push Greece closer to a euro zone exit and unleash a wave of contagion.

Spanish Industry Minister Jose Manuel Soria repeated on Saturday the government's argument that it should not act until it sees a separate audit of the banking system due by June 21 from two independent assessors, Oliver Wyman and Roland Berger.

But officials in Spain also said the parameters for the IMF and the private sector audits were effectively the same, meaning Spain could make the request for aid on the basis of the IMF figures rather than having to wait for the other assessment.

'If the government decides to seek a rescue, whatever the formula being used, we need to say two things: first the innocent should not suffer for the guilty, second public money should come back to public coffers,' said Socialist opposition chief Alfredo Perez Rubalcaba after speaking with Prime Minister Mariano Rajoy on Saturday morning.

The government has already spent 15 billion euros bailing out small regional savings banks that lent recklessly to property developers.

Spain's biggest failed bank, Bankia, will cost 23.5 billion euros to rescue and its shareholders have been wiped out.

'I'm not particularly keen on a bank bailout because it's totally unfair. Banks should work like any other business. If they have profits they can keep them, if they lose money they have to assume the losses,' said Javier, a Madrid resident who did not want to give his name or age.

Bundesbank president Jens Weidmann said Spain should turn to the European Financial Stability Facility (EFSF) rescue fund if it could not afford the bank recapitalization bill.

In an interview to appear in Sunday's Welt am Sonntag newspaper, Weidmann said: 'If Spain sees itself overwhelmed by financing needs, it should use the instruments that were created for that.'

The race to resolve the banks' troubles comes after Fitch Ratings cut Madrid's sovereign credit rating by three notches to BBB, highlighting the Spanish banking sector's exposure to bad property loans and to contagion from Greece's debt crisis.

It said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion). The higher figure would be in a stress scenario equivalent to Ireland's bank crash.

Italy could yet get dragged in too. Its industry minister, Corrado Passera, said the economic situation in Italy had improved since the end of 2011, but remained critical.

'Europe was more disappointing than we had expected, it was less capable of tackling a relatively minor problem such as Greece,' Passera told a conference. If a request is made, Spain is expected to ask for help from the 440 billion euros EFSF.

The process is likely to involve bonds from the EFSF being injected into Spanish banks with no new capital raised, a euro zone official said on Friday. The bonds can then be used as collateral, allowing the banks to access ECB liquidity.

While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.

That would be crucial to avoid overstraining the euro zone's rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.

Conditions in the plan would be related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy's government has already put in place, EU and German sources said.

A 'bailout lite' would help salve Spanish pride. Spain is the world's 12th largest economy and No. 4 in the euro zone. EU and German officials have cited national pride as a barrier to requesting a full assistance programme.

The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.-Reuters